Archives for August 2018

The bulls had their wings clipped on Friday, making it three straight down days for stocks although the bears haven’t made much progress just yet. The macro concern right now is the collapse in the Turkish Lira. Similar to Greece and Cyprus, Turkey by itself has the economic output of Connecticut and the world really doesn’t care what some crazy dictator does to his country, per se.

However, any time there is a crisis in the emerging markets complex, two things spring up. Will there be contagion? And do the major global banks have exposure? The answer to the first question is probably not. The second questions is yes, and mostly in Europe where banks were all warm and fuzzy to the 20% interest rates being offered not long ago. Now, not so much!

All of the major stock market indices look like they want to trade a little lower before mounting a counter offensive. There is no clear cut leadership although the NASDAQ 100 is trying hard. Sector leadership remains unchanged with discretionary leading followed by transports. Banks are neutral and semis are on the defensive which seems odd with the tech-laden NASDAQ 100 trying to lead.

Let’s keep an eye on Tuesday as a possible day for a short-term rally to begin. I keep saying to watch gold for signs of the bottom and that remains a theme. It looks like the metal in the “puke” stage where it is being sold almost indiscriminately. A low should be forming sooner than later.

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After writing about beloved tech giant, Apple, for so long, I thought I would keep it going and turn to another overly owned and loved FAANG stock, Facebook. As you know Facebook has had its share of triumphs, trials and tribulations since its infamous 2012 IPO, but mostly troubles this year with the personal information collection scandal at Cambridge Analytica.

For those who invested in Facebook at the opening price in 2012, you endured incredible pain as the stock plummeted by more than 50% right out of the gate. However, those who didn’t panic (hard not to) were handsomely rewarded as the stock ran in almost straight line fashion to its 2018 all-time high above $218 as you can see below.

Since Facebook’s glorious peak where it could do no wrong and was well on the way to controlling the world, a funny thing happened. Users starting saying “enough is enough”. They demanded privacy protection. I thought that was just an emotional response to the scandal and all would be fine in a few months.

Then came the release of Q2 earnings last month. All was definitely not fine as you can see below.

On the far right side of the chart you can see the long, vertical red line which I drew in. That’s to show you how far the stock dropped from the close before earnings to the open after earnings were announced. It was U-G-L-Y!

The conference call with management revealed this was not an outlier or one off event. Facebook forecast that future growth would decelerate, just about the single worst thing possible for an overly owned and loved growth stock. That was bad.

Given the news and where I perceive stocks to be in the cycle, I think there is a very good chance that Facebook has seen its peak for possibly many years to come. I think the best case is that the bull market somehow lives on into 2020 and the stock can revisit its prior high above $218 before peaking again. Worst case is that the market is in the early stages of of revaluing the company and after this rally ends, the stock not only heads below the July low of $166 but then below the 2018 low of $149 in the next 6-12 months.

Yes, I am anything but positive on Facebook. It will take an awful to change my opinion. With the F (Facebook) and N (Netflix) in FAANG on the defensive, it puts much more pressure on Apple, Amazon and Google to lead and outperform. I had envisioned the FAANG stocks holding up until the bitter end of the bull market and find it hard to believe the bull market can easily live on without the group as a whole staying strong.

Bottom line – the best strategy in Facebook is to now sell strength until proven otherwise.

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Quick update as I am trying to get a full Street$marts out today or tomorrow. The theme remains the almost same. I thought a modest pullback would materialize and take the major indices below last week’s low. However, as I mentioned on Friday, the bulls put in a strong performance, like the Red Sox did over my Yankees, and took control from the bears on Thursday. That strength continues today with the S&P 400 and NASDAQ 100 leading with the Dow ceding leadership.

The rising tide is lifting most ships as the S&P 500, S&P 400, Russell 2000 and NASDAQ 100 are very close to all-time highs. The Dow will get there but it’s going to take some time. Sector leadership remains disappointing with the semis and banks being lifted by the market and not the other way around. Discretionary has been solid as a rock with transports coming on strong.

Junk bonds are continuing their resurgence and the NYSE A/D Line is making marginal all-time highs right now. BULL MARKETS DO NOT END WITH THIS KIND OF ACTION!

Don’t forget about gold and gold stocks. They are almost so bad, they are good. Almost…

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So much to discuss, too little space on the blog. I know. I know. I need to do a full Street$marts which I promise to bang out shortly. First, Fed statement day actually worked out okay as the market stayed in a tight range as forecast until 2pm and then rallied modestly into the close. Not a huge winner, but a win is a win and it kept the almost 80% accuracy rate going.

Apple is now a trillion dollar company. I am sure you couldn’t find that news anywhere! With all of the positive press, it’s getting to the point of being so good, it’s actually bad. That’s the exact opposite of gold which I have been discussing.

Stocks have been acting better than I thought this week, especially after a moderately down opening on Thursday. While the Dow Industrials didn’t set the world on fire, the NASDAQ 100 and Russell 2000 certainly did. The former rallied 2% from open to close, which is a huge move in low volatility environment. Apple, Facebook and Amazon had a lot to do with that.

Market-wise, the bulls made more progress than I thought and they have the ball for now although I still do not believe we have seen the low point for the pullback. Unless all five indices close above their July peaks, I do think the lows for this week will be breached sooner than later.

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As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Over the past few meetings, many of the strongest trends were muted but today is at least a little different.

As with most statement days, the model for the day calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. If the stock market opens outside of that range which seems very unlikely today, there is a strong trend to see stocks move in the opposite direction until 2:00 PM. For example, if the Dow opens down 1%, the model says to buy at the open and hold until at least 2:00 PM.

Last meeting stocks rallied to their highest level in 50 days, thereby muting a strong trend. Today, we do not have the same regime. There is a strong trend in play for stocks to rally on statement day and especially after 2 PM.

After the last meeting on June 13, I mentioned that a trend may be in play for stocks to decline. That trend ended up working out very well as the S&P 500 went from 2780 to 2700 in the two weeks after the meeting. That trend is very unlikely to be active after today.

Powell & Co. to Stand Pat Today

After raising interest rates by 0.25% 6 weeks ago, Jay Powell and company won’t be undertaking any action after today’s meeting. Markets will be paying very close attention to the statement released for clues about the Fed’s thinking for the rest of 2018. As I have mentioned all year, the likelihood is for four rates hikes this year with the next two coming in September and December. I just continue to chuckle and shake my head when I recall how many pundits changed their views to two or even a single rate hike when stocks were declining in February. They were better off just saying they didn’t have strong conviction rather than chase interest rates like lemmings.

That’s the problem with the vast majority of analysts; they focus too much on what is currently happening and lose sight of the intermediate-term and the big picture. Then, they get amnesia and revise history to never be wrong. I have never had a problem standing by forecasts, even when I end up being wrong. It’s all part of the business. Some I get right with precision accuracy while others I have fall flat on my face. Get up, move on and learn.

Economically, things are pretty firm right now with strong Q2 GDP growth, record corporate profits, inflation back up in the zone and more jobs open than people to fill them. Consumer confidence and consumer sentiment are at or near record highs. Only the tariffs are holding back the economy. In some way, it doesn’t get much better than this. Reread that last sentence. That’s the one that concerns me a little bit, not so much for the next few quarters, but certainly as we get into the middle of 2019. If it can’t get much better than this, it only has one way to go although recessions do not begin with data like this. It takes time for bad behavior to permeate the system and confidence to become exuberance.

Fed Arrogance & Ignorance Keeps on Truckin’

To reiterate what I have said for more than a year but a little more bluntly, the Fed is misguided, arrogant and in desperate need of help. NEVER before have they sold balance sheet holdings in the open market AND raised interest rates. In fact, I don’t think it’s ever been done in the world before. So why on earth do they believe they will so easily be successful? This grand experiment is going to end poorly and we are all going to suffer at the hands of the next recession which I stabbed in the dark as beginning between mid 2019 and mid 2020.

Yes, with banks holding $2.5 trillion on their balance sheets, the recession should be mild and look nothing like 2007-2009. And yes, this expansion will be more than 10 years old. And yes, there will be some external trigger like 9-11 or the S&L Crisis to push the economy over. This time, it could be tariffs or a European banking crisis. But the Fed will have greased the skids sufficiently for the economy to recess.

Let’s remember that the Fed was asleep at the wheel before the 1987 crash. In fact, Alan Greenspan, one of the worst Fed chairs of all-time, actually raised interest rates just before that fateful day, stepping on the throat of liquidity and turning a routine bull market correction into a 30% bear market and crash. In 1998 before Russia defaulted on her debt and Long Term Capital almost took down the entire financial system, the Fed was raising rates again. Just after the Dotcom Bubble burst in March 2000, ole Alan started hiking rates in May 2000. And let’s not even go to 2007 where Ben Bernanke whom I view as one of the greats, proclaimed that there would be no contagion from the sub prime mortgage collapse.

Yes. The Fed needs to stop.

Velocity of Money Most Important

Below is a chart I have shown at least quarterly since 2008. With the exception of a brief period from mid 2009 to mid 2010, the velocity of money collapsed. It’s still too early to conclude, but it does look like it stopped going down in 2017 and might be just slightly starting to turn up as you can see on the second chart of M2V since 2008. If 2017 does turn out to be the bottom, this would also coincide with the bottom of the commodity cycle which I have discussed and should lead to a massive commodity boom over the coming decade, especially in the non-energy products.

In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a disastrous bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

These two charts definitely speak to some structural problems in the financial system. Money is not getting turned over and desperately needs to. The economy has been suffering for many years and will not fully recover and function normally until money velocity rallies. This is one chart the Fed should be focused on all of the time.

It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets. It continues to boggle my mind why no one called the Fed out on this and certainly not Powell so far at his quarterly press conferences.

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